Lansner: Keating lessons lost on small investors

April 7, 2014

Updated 6:29 a.m.

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In this May 9, 1990, file photo, savings and loan financier Charles H. Keating Jr., appears at a National Press Club luncheon in Washington. Keating, the financier who was disgraced for his role in the costliest savings and loan failure of the 1980s, has died. He was 90. , FILE PHOTO: RON EDMONDS, ASSOCIATED PRESS

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In this May 9, 1990, file photo, savings and loan financier Charles H. Keating Jr., appears at a National Press Club luncheon in Washington. Keating, the financier who was disgraced for his role in the costliest savings and loan failure of the 1980s, has died. He was 90. FILE PHOTO: ASSOCIATED PRESS

In this May 9, 1990, file photo, savings and loan financier Charles H. Keating Jr., appears at a National Press Club luncheon in Washington. Keating, the financier who was disgraced for his role in the costliest savings and loan failure of the 1980s, has died. He was 90. , FILE PHOTO: RON EDMONDS, ASSOCIATED PRESS

In today’s world, where savers get nearly nothing on their deposits, you’d think it would be instructive that the nastiest slice of the Lincoln S&L debacle – Charles Keating’s crew switching savers from insured deposits into risky corporate notes – came at a time when investors sought better returns as the rates bankers offered on risk-free accounts were dipping under 10 percent.

But a quarter-century after Keating fleeced Lincoln S&L and some of its savers, Irvine attorney Ron Rus still doesn’t think the small-fry investor has learned many lessons about the perils of chasing a few extra dollars in returns.

Keating’s death at age 90 last week stirred numerous emotions tied to a 1989 high-profile banking collapse that cost taxpayers $3 billion and sent Keating to jail for four-plus years for financial crimes tied to the S&L’s failure. Rus got a detailed view of the debacle as a member of the legal team that helped some 17,000 small investors recoup much of their losses from uninsured investments peddled by Keating’s crew at Irvine-based Lincoln.

“People think they’re protected by government,” Rus says. “That’s naïve. That’s impossible. Even the most intelligent regulator will be outsmarted by someone with a profit motive.”

The infamously crooked S&L persuaded savers to move their deposits to unsecured notes issued by Lincoln’s holding company, American Continental Corp., which was led by Keating. When regulators seized Lincoln, American Continental was left with few assets. The Phoenix-based holding company collapsed into bankruptcy, leaving the depositor-turned-bondholders with worthless paper.

Rus says he has sadly watched similar scenarios play out over the years. The typical American family is overwhelmed by a world with a growing demand for financial savvy – and may have an unhealthy, false sense of security from loose knowledge of massive amounts of financial rule-making.

The Lincoln investors whom Rus represented couldn’t fathom that an institution known for government-insured deposits would also aggressively peddle high-risk corporate notes.

Keating’s ruse wasn’t a get-rich scheme. Actually, the interest rates American Continental paid on its uninsured notes were only slightly above S&L savings rates, which had declined from 12 percent plus during the 1980s into high single-digits.

The relatively modest rates offered by American Continental – a percentage point or two higher than insured rates – were one piece of a sophisticated ploy to make these non-traditional investments seem safe and legitimate.

Keating – a gruff personality with expensive tastes for living – crafted a wild high-wire-act business plan for Lincoln that included everything from land development to luxury hotels to trading in junk bonds and commodities. Savers who turned their government-backed deposits into bets on Keating weren’t warned about Lincoln’s casino-like strategy.

Instead, Keating’s pitch to note-buyers was a picture of fiscal sanity bolstered by big-name attorneys and accountants hired to certify the veracity and strength of American Continental’s financial shape.

Sadly, later investigations found that the company was a financial train wreck waiting to happen and that several of Keating’s hired experts had violated their own professional ethics to win his lucrative business.

Oh, and there was Keating’s extensive political muscle that meant he could gather five U.S. senators – including the late Democrat Alan Cranston of California and Republican John McCain, who still serves Arizona – to bully banking regulators who were asking tough questions about Keating’s handling of Lincoln.

The deposit-to-debenture switch was also as cold as it was calculated. Lincoln insiders knew the limited financial smarts of its customers. One internal sales memo listed “the meek, the weak and the ignorant” as prime sales targets.

And in some ways, Keating’s antics should have not been a surprise. Eight years before he completed American Continental’s 1984 purchase of Lincoln, Keating was hit with civil sanctions by the U.S. Securities and Exchange Commission for improper accounting actions while managing another company.

“Any major fraud requires certain badges of legitimacy to keep going,” Rus says. “A suede-shoe guy just can’t go out and steal. He’s got to go out and surround himself with highly regarded attorneys and accountants. And if you know U.S. senators – well, you must be legit.”

Keating’s helpers became the targets after American Continental’s collapse. Rus and other attorneys won a series of sizable settlements from litigation against various Keating legal and financial advisers. Keating himself lost a multibillion investor civil fraud case tied to the Lincoln note sales, but he never paid a dime because he was declared broke.

All told, attorneys representing defrauded Lincoln savers collected $240 million in settlements – funds that made a major dent in the estimated $280 million lost by holders of the worthless American Continental notes. Chasing a scammer’s team of experts has become a common recovery tool – most notably in nearly $10 billion in settlements won in recent years from professional advisers of investment conman Bernard Madoff.

Rus admits there remain no easy answers of how to better protect mom-and-pop investors from the cut-throat investment world in an age when everyday people are being asked to do more and more tricky money-management chores.

It’s particularly challenging in an era in which banks pay nothing on savings and the stock market’s recent fancy gains may be illusory.

More efforts could be made to educate the masses on smarter money management, though Rus quipped that “perhaps more ethics classes in business school” might help too.

One thing that Rus is certain of is that folks on Main Street won’t be better protected from the next Wall Street sharpie by adding more rules governing financial pros to the monetary puzzle.

“I have a great deal of sympathy for the people who were taken advantage of at Lincoln, but I think they thought they were being protected by a government that couldn’t,” Rus said. “Greater regulation would have not stopped Keating ... a thief is a thief.”

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